Cryptocurrencies were set to disrupt and completely revolutionize the use and the very concept of money. Yet, 10 years on from the launch of Bitcoin — the pioneer among cryptocurrencies — cash is still alive and well, and the digital currency revolution is not in sight. The economic institution to revive the hype around digital currencies may be one above any suspicion: the central bank.

Cryptocurrencies
have two features that make them resemble cash. They guarantee anonymity and can be exchanged peer to peer. In the
practice of daily life, however, Bitcoin & co. miserablyfail
the three basic textbook definitions for a currency. Because of their extreme volatility,
cryptocurrencies can hardly be regarded as a unit of account. As a consequence, they perform extremely bad as a store of value and distinguish
themselves for being a rather unstable and ineffective medium of exchange. What’s more, cryptocurrencies are a liability
of nobody. The value of physical cash is in fact “guaranteed” by a central bank
whose mandate is precisely to prevent the debasement of the currency’s
purchasing power. The fatal flaw of cryptocurrencies is that there is no
authority accountable for stopping their value from falling to zero.

So,
cryptocurrencies arguably lay the foundations for a digital alternative to cash
but still don’t warrant reliability.
To foster the “digital currency revolution”, some countries adopted a
simple solution: making their central banks accountable for the value of a
national digital currency (seeTunisia and Senegal for references). But among the central banks of the major world
economies, none has dared to take the plunge and introduce a digital currency
open to the general public. The truth is that consumers of developed economies
with stable currencies (ie, with low and controlled inflation) still have a
strong preference for physical cash. There’s an exception, though: Sweden.

In the
Scandinavian kingdomaffection
for cash has grown cold. In the last years, circulating kronas (the Swedish currency) have
been steeply shrinking inabsolute andrelative terms. Swedes increasingly opt for bank cards or payment apps to
settle their purchase transactions. The collapse of the demand for cash has led
banks to respond by closing down ATMs. This, in turn, has further weakened the
demand for cash, ushering in a circle — virtuous or vicious, go figure.

Such behaviour
could have serious consequences on the economy. The traditional channels through which the central bank implements
its monetary policy (and thereby keeps inflation in check) are hamstrung by the
disappearance of circulating cash. Confronted with the risk of being unable to
fulfil its mandate to preserve price and financial stability, the Sveriges
Riksbank (Sweden’s central bank) has launched aproject plan to study the feasibility and the possible impact of the introduction
of an e-krona.

According to itslast
report, the Riksbank indicates the solution of a
value-based e-krona as the most promising. A value-based e-krona would closely resemble cash, insofar as it
would be stored on a medium (a prepaid card or an app) and exchanged offline
via card readers or specific smartphone technology. This configuration entails
a significant involvement of the Riksbank in the payment system. The central
bank would trace transactions carried out with the e-krona and would run the
digital platform containing the ledger. Before any final decision, however, the
Riksbank plans to carry out a pilot project in order to test the collateral
risks linked to the e-krona.

The reason why
the Swedes are so cautious is that the provision of a digital currency backed
by a major central bank is an uncharted territory. A central bank’s digital currency (CBDC) would represent a close
substitute for — and, thus, a competitor of — commercial banks’ deposits. A
CBDC might exacerbate the risk of bank runs, for it would make much simpler
draining one’s bank account. Deposited capital could be transferred on an
e-wallet and converted into CBDC, while comfortably sitting on the couch (in
the same way as we withdraw from the ATM, converting our deposits into cash).
The new system needs therefore clear-cut and thoughtful boundaries, to avoid
the emergence of new risks.

Both on the
technological and policy sides, the introduction of a CBDC represents a
daunting challenge, indeed. The Riksbank has
embarked on its brainstorming exercise because of the peculiar domestic
situation. Nonetheless, in a continuously digitizing world, can the guardians
of our money’s value leave the monopoly of digital money to commercial banks?
In today’s financial system, money in electronic format for the general public
exists almost exclusively in the form of deposits, ie liabilities of commercial
banks. A CBDC, on the contrary, would be by definition a liability of the
central bank and, much like cash, represent a risk-free asset always available
for electronic payments. Providing a digital alternative to cash might be a
gamble, sure. But taking the time to ponder how to best design new monetary
tools and anticipating the evolution of the digital and currency worlds might
be worth a thought.